If the seller does not provide a Section 116 Clearance Certificate at closing, the buyer could be on the hook for the seller’s unpaid taxes. This Blog post breaks down the process and show you how to avoid common pitfalls.
Step 1: Determine the Seller’s Residency Status
Residency is not the same as citizenship. A person can be a Canadian citizen and still be a non-resident for tax purposes.
To determine if the seller is a non-resident:
- Consider how much time they’ve spent in Canada.
- Look at ties to Canada (home, spouse or dependents, driver’s license, health insurance).
- If there’s uncertainty, the seller should request a ruling from the CRA using Form NR73.
Only if the seller is a non-resident, Section 116 tax rules apply.
Step 2: Confirm the Property is “Taxable Canadian Property”
Almost all real estate in Canada qualifies as Taxable Canadian Property (TCP) under the Income Tax Act. This includes:
- Homes, cottages, rental properties
- Land or commercial buildings
- Interests in companies or trusts that hold Canadian real estate
If the property qualifies, Section 116 rules kick in for non-resident sellers.
Step 3: File Form T2062 with CRA
If the seller is a non-resident, they must notify the Canada Revenue Agency by filing Form T2062 before or within 10 days of the sale closing.
This form:
- Reports the sale
- Estimates any capital gains
- Starts the process of getting a Clearance Certificate
If the seller fails to file on time, they may face late penalties of up to $2,500.
Step 4: Understand the Withholding Tax
If the seller does not provide a Clearance Certificate by the time of closing, the buyer is legally required to withhold and remit part of the purchase price to CRA.
Here’s how much must be withheld:
- 25% of the gross sale price for most residential properties
- 50% for depreciable or income-producing properties (e.g., rentals, commercial, Airbnb)
This money is held in trust by the buyer’s lawyer and then paid to CRA. If this step is missed, the buyer can be held responsible for the seller’s unpaid taxes.
Step 5: Certificate of Compliance or Comfort Letter
Once the CRA processes Form T2062, they may issue a:
- Certificate of Compliance (Clearance Certificate), OR
- Comfort Letter (temporary relief while the certificate is processed)
These documents confirm the seller has met their tax obligations. If a certificate is not provided at closing, funds must be withheld and sent to CRA within 30 days after the end of the month in which the sale closed.
Step 6: File a Canadian Tax Return
After the sale, the seller should file a Canadian tax return to calculate the actual capital gains tax owed (or get a refund if too much was withheld).
This is where the seller can:
- Report expenses or capital improvements
- Claim exemptions (e.g., principal residence exemption)
- Potentially recover some or all of the withheld funds
This step is essential if the seller wants to receive any overpaid tax back.
CRA Timing Expectations
The CRA recommends sellers submit Form T2062 at least 30 days before closing. However, the full processing time for a Clearance Certificate can take 8 to 12 weeks or longer.
That’s why early preparation is key—waiting too long can result in unnecessary delays, complications, and loss of sale proceeds.
Key Risks to Avoid
- Failing to confirm residency can lead to missed obligations and legal liability.
- Not withholding taxes when required can make the buyer liable for the seller’s taxes.
- Missing deadlines for filing or remittance can trigger CRA penalties and interest.
- Mishandling rental or mixed-use properties (e.g. Airbnb, home office) can increase the withholding rate to 50%.
Summary Checklist for Non-Resident Sales
Here’s a quick reference for real estate agents, lawyers, and clients:
| 1. | Confirm seller’s residency status |
| 2. | Ensure property is “Taxable Canadian Property” |
| 3. | File Form T2062 (ideally before closing) |
| 4. | Withhold 25% or 50% of the sale price at closing |
| 5. | Remit funds to CRA within required timelines |
| 6. | Obtain Certificate of Compliance or comfort letter |
| 7. | Seller files Canadian tax return to calculate actual tax |
Selling Canadian property as a non-resident involves more than just signing paperwork. Withholding tax, CRA filings, and legal obligations create a complex process that must be managed properly.
At Cactus Law, we specialize in guiding both buyers and sellers through the complex requirements involved in non-resident real estate transactions.
Here’s how we can help:
- Determine residency status and explain tax implications clearly
- Assist in completing and filing Form T2062
- Coordinate the withholding process and ensure legal compliance on closing
- Communicate with CRA to monitor the status of the Clearance Certificate
- File or support your tax filings to help you recover overpaid withholding
- Protect buyers from unexpected liability if a non-resident seller has not followed proper procedures
Our experienced team understands how overwhelming this process can be, especially when you’re dealing with cross-border tax issues or time-sensitive closings. We’ll make sure your transaction stays compliant and stress-free.